When purchasing a home, you will also be purchasing a mortgage. Many first time home buyers are unaware of the options they face when shopping for a mortgage. Choosing the wrong one can cost thousands of dollars, so buyers need to beware of the choices they face.
The most common type of home loan is a fixed rate mortgage. This is a loan that carries a fixed rate for a set period of time, otherwise known as the term of the loan. Fixed-rate loans can be held for many different terms, ranging from 15 to 50 years. Over that time, the interest rate, which will be slightly higher than the national interest rate at the time of the home's purchase, will not change. The only way to change the interest rate is to refinance, which is basically purchasing a new loan.
Interest-only mortgages are somewhat deceiving, because they do not work like a traditional mortgage. In this loan structure, the borrower is only required to pay the interest portion of the loan. The only money put towards the principle of the loan is the money the borrower chooses to add to the loan payment, which means there may be months when no money is added to what is actually owed. This can help buyers get into a home when they cannot afford the monthly payment on a traditional loan, but when the loan term is over, the entire principal amount will be due. These loans are usually only available for a short period of time, making them less than ideal for those who plan to stay in their home for a while. Sometimes people who are flipping a property and anticipate making a profit on the resell price can benefit from this loan structure.
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